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New solution to European debt crisis: refinancing Europe's banks?

As the global economy founders, refinancing Europe's banks to deal with the debt crisis might be preferable to bailing out countries, experts say – and politicians are starting to agree.

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“A stress test simulates certain scenarios,” says Hans-Peter Burghof, chairman of the Banking and Finance Department at the University of Hohenheim. “But fearing a self-fulfilling prophecy, Europe’s financial watchdogs avoided to test the worst-case scenario. The EU’s political leadership must be blamed for the current banking crisis.”

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A shift against bailouts?

Still, refinancing Europe’s lenders might be cheaper in the end than repeatedly bailing out whole economies. German Chancellor Angela Merkel and the president of the EU Commission, Manuel Barroso, both declared earlier this week that a recapitalization of banks should be considered, and on Thursday, Trichet announced that the ECB would later this year give out loans with a 12-month maturity.

This could also be seen as an acknowledgement to the growing opposition towards bailouts. Yesterday, the Dutch parliament approved the expansion of the eurozone bailout fund EFSF, as did the German Bundestag last week, in spite of growing public opposition. Next week, the last two eurozone countries, Malta and Slovakia, are expected to vote, and in Slovakia the outcome is open.

“Expanding the EFSF means trying to solve the debt crisis with new debt. This won’t work, and we won’t pay for it,” Slovak politician Richard Sulik said in an interview with the German Spiegel magazine. Mr. Sulik is president of the Slovak parliament, and his party, a member of the governing coalition, will vote against the expansion, which has to be ratified by all eurozone members.

“I understand the Slovaks,” says Professor Burghof. “Their per-capita income is half that of Greece, their public debt rate is high, and they are trying to bring it down through painful austerity measures. So why should they feel inclined to help the Greeks?”

Meanwhile in Athens, the government of George Papandreou is facing persistent opposition to reforms of the public sector and spending cuts. On Wednesday, a general strike brought life in the capital and several other cities to a halt: planes remained on the tarmac, trains in stations, and ferries in ports. Tens of thousands protested against the government, and according to the Greek daily Kathimerini, Prime Minister Papandreou told members of his socialist party he was afraid of a “big bang” among the population.

“If the Greeks don’t make an effort themselves, we won’t be able to help them,” says economist Mr. Hinze. “Calling for more European integration to solve the crisis is nonsense, national interests in the EU are too diverse. What we need for the euro is a set of rules, which are followed. And those who don’t follow the rules must get kicked out until they change and join again.”

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